Earlier this month, the Ninth Circuit rejected a “will not reapply” clause in a settlement agreement under Business & Professions Code Section 16600, the California state statute that makes most non-compete provisions unenforceable. It is unclear if the holding is limited to the particular facts or if all “will not reapply” clauses are at risk. Such clauses are typical features of settlement agreements arising from employment-based disputes. In settling such disputes, the employer does not want to risk another lawsuit on the same grounds brought by the same person in connection with another job. The employer will bargain for the “will not reapply” clause, giving the employer a contractual basis to reject future employment for that same person, and thus avoiding the risk of another suit. The Ninth Circuit decided, in the case at bar, that Section 16600 precludes such a provision as unenforceable restraint of a substantial character on the ability to work within a particular field or industry.
In Golden v. California Emergency Physicians Medical Group, 2015 WL 1543049, __ F.3d ___ (9th Cir. April 8, 2015), the Ninth Circuit considered the appeal of a physician seeking to invalidate of the “will not reapply” clause of a settlement agreement to end a dispute he had with his former employer, the California Emergency Physicians Medical Group (together with certain other defendants, the CEP). Dr. Donald Golden, the plaintiff physician, was an ER doctor who had lost his staff membership at a hospital that was managed by CEP, a consortium of over 1000 physicians that manages or staffs many emergency rooms, inpatient clinics and other facilities in several mostly Western states. Golden had previously sued CEP in Superior Court in the Bay Area for race discrimination, among other things. CEP removed that action to federal court. Prior to trial, Dr. Golden and CEP reached a settlement that the parties put on the record in court. In return for a substantial monetary amount, Dr. Golden consented to relinquish his current suit, to forego all other possible claims he may have against CEP, and furthermore to waive any and all rights to employment with CEP or at any facility that CEP may own or with which it may contract in the future. At a hearing, the magistrate judge then presiding confirmed orally with Dr. Golden that he agreed, although he did so “extremely reluctantly.”
After the hearing, the terms of this agreement were subsequently reduced to writing. But, Dr. Golden had a change of heart and refused to sign. The magistrate judge, however, enforced the agreement on Dr. Golden’s oral representation.
Dr. Golden then appealed on the grounds that the settlement agreement was unenforceable because the “will not reapply” provision was contrary to Section 16600.
Section 16600 of the California Business and Professions Code instructs that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
In analyzing the issue, the Ninth Circuit explained that the California Supreme Court has not ruled that Section 16600 applies only to typical so-called “non-compete covenants”: “California seems not to have settled whether a contract can impermissibly restrain professional practice, within the meaning of the statute, if it does not prevent a former employee from seeking work with a competitor and if it does not penalize him should he do so.” Ultimately, the Ninth Circuit refused to so limited Section 16600’s reach.
Thus, the Ninth Circuit applied that Section to Dr. Golden’s settlement agreement and refused to enforce it, holding:
- The statute (Section 16600) does not specifically target covenants not to compete between employees and their employers: the text does not include any form of the word “compete” or “competition,” and does not even implicitly constrain itself to contracts concerning employment. Rather, section 16600 voids “every contract” that “restrain[s]” someone “from engaging in a lawful profession, trade, or business.”
- In light of the narrow exceptions to general prohibitions against the non-enforceability of contracts purporting to restrain trade (contained within the Business & Professions Code, namely Section 16601 and 16602.5) all pertained to “more conventional non-compete covenants”, this made it more likely that the general prohibitions to contracts purporting to restrain trade would extend to a more expansive category of restrictive covenants.
The Court also relied on common law precedent, finding that the California Supreme Court long ago (1916) barred a contract requiring the party to not take up employment within a certain geographical area, but if he did, he would owe $5,000 in liquidated damages. Then, pointing to Edwards v. Arthur Andersen LLP, 44 Cal.4th 37 (2008), the more recent seminal case resolving many issues with respect to non-compete contracts within California, the Court noted that while Edwards “was a more traditional variety of non-compete covenants” – an employment agreement forbidding a CPA from poaching the former accounting giant’s clients and personnel after leaving the firm – “[t]he decisive concern for the court… was that the agreement ‘restricted [Edwards’] ability to practice his accounting profession.”
Accordingly, the Ninth Circuit sent the case back to the district court, ordering that the district “court should direct its inquiry according to the actual statutory language: whether the challenged provision “restrain[s anyone] from engaging in a lawful profession, trade, or business of any kind.” This prohibition extends to any “restraint of a substantial character,” no matter its form or scope. The statutory context of section 16600 furthermore suggests that the prohibition on professional restraints extends to a larger category of contracts than simply those where the parties “agree … to refrain from carrying on a similar business within a specified geographic area.” Cal. Bus. & Prof.Code § 16601; see also Edwards, 81 Cal.Rptr.3d 282, 189 P.3d at 293 (‘[The prohibition in section 16600 is] unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect.’).”
In reaching its decision, the Ninth Circuit noted that the former employer CEP controlled many hospitals and that the clause itself covered other hospitals that CEP might acquire in the future. It is not clear the decision would have gone the same way if the Ninth Circuit were convinced that the prohibition left many future opportunities open to Dr. Golden.
What can be learned from the Golden case? California companies and executives need to be aware of the case and, when settling employment disputes and certain other types of business litigation, consider how to more narrowly tailor their settlement clauses or use other mechanisms to diminish the risk of future suits.